Technology Transfer to China
U.S. Commercial Technology Transfers to the Peoples Republic of China
EXECUTIVE SUMMARY
The phenomenal economic growth witnessed in China since Deng Xiaoping first
declared China's "A Open Door" policy in 1978 has led many to predict China's
certain emergence as an economic superpower in the early 21st Century. Indeed,
China has followed a structured path toward gradual market reform of its still
largely state-owned industrial sector, which has been transfused with increasing
amounts of foreign capital and technology.
There have been numerous reports over the last several years, however, of
US companies being "forced" to transfer technology to China in exchange for
access to this enormous market. The purpose of his study is to assess the
extent to which US commercial technology is being, in effect, "coerced" from
US companies engaged in normal business practices and joint ventures in China
in exchange for access to Chinas market. The cumulative effect these
transfers may have on Chinas efforts to modernize its economy as well
as its industrial and military base is also examined. Finally, this study
addresses the impact of US technology transfers to China on the issues of
long-term US global competitiveness and broad economic and national security
interests.
PART
1:
TECHNOLOGY TRANSFER - CHINESE POLICIES AND PROCESSES
The first section of this study addresses Chinas foreign investment
and trade policies, regulations, and practices, which largely explain how
and why US technology is being transferred to China. The answer lies in the
underlying and stated objectives of Chinas foreign investment and trade
policies, the goals of which are modernization and self-sufficiency of Chinas
industrial and military sectors. The transfer of US and other Western technology
plays an important role in these efforts. This section, therefore, describes
Chinas policies regarding reform of its scientific and research and
development institutions; Chinas ability to absorb, assimilate, and
innovate transferred technology; as well as the emerging role of US high-tech
firms in Chinas science, technology, and research efforts.
Key findings:
Science and Technology
- Chinas large-scale science and technology development plans and
projects are dependent upon indigenous research and technological advances
as well as foreign investment, research, and technology. Comparative analysis
of Chinas rules and regulations regarding domestic and foreign investment
in these and other state-run programs reveals discriminatory provisions
regarding the rights and obligations of foreign partners. As a result, US
companies currently engaged in collaborative research under the aegis of
these state plans risk losing the monetary and technological gains from
their investments.
Research and Development
- By 1993, more than half of Chinas large state-owned enterprises
(SOEs) had established technical development centers, founded for the purpose
of improving production efficiency as well as increased product quality
and marketability. Chinas policies for industrial and commercial reforms
continue to emphasize the need for cooperation among Chinas industrial,
commercial, and research enterprises in an effort to bolster the revenues
of Chinas state-owned enterprises and to modernize Chinas economy
as a whole. This effort has achieved mixed results to date.
- In an effort to spur domestic technological innovation and to diffuse
applied technologies across government, industry, scientific, and academic
communities, China has established numerous National Engineering Research
Centers (NERCs) across the country. These centers play a key role in Chinas
strategy to reform its science and technology research system and are likely
to become more prominent over time. The highly regarded Chinese Academy
of Sciences (CAS) has also established over 500 commercial enterprises in
the high-tech sector as part of a government program to develop "technical
enterprises" as subsidiaries of existing research institutes.
Chinas Ability to Absorb and Apply Technology
- China has no shortage of well-trained scientists, engineers, mathematicians,
or other technical experts, unlike the United States. Chinese scholars educated
abroad over the last decade reportedly make up more than half of the top
scientific researchers now working on key research projects and receiving
priority in conducting this research. As Chinas economic reforms continue
and older researchers retire before the turn of the century, there will
be more opportunities for Chinas younger, Western-educated, science
and technology-minded researchers and engineers. As a result, high-tech
firms in the United States and the government of the PRC are competing in
some cases today for the services of these same talented individuals.
- China is increasingly attractive for highly skilled, Western-trained Chinese
workers given the increased opportunities to work with US and other high-tech
firms in China. This fact plus the benefits that accrue to the US firm as
a result, make it likely that the trend toward US high-tech firms establishing
joint ventures accompanied by R&D and training centers in China will
continue for the foreseeable future.
Foreign Direct Investment
- Chinas investment policies are explicit in the type of foreign investment
that is "prohibited," "permitted," or "encouraged," with the latter category
focusing on advanced technologies. Foreign investors in high-tech industries
enjoy preferential treatment, such as tax rebates and lower tariff rates
as incentive to transfer technology, but are at the same time subject to
regulations not imposed on domestic competitors.
- Chinas investment policies are geared toward shifting foreign investment
into the central and Western parts of China. As this trend takes hold, US
companies will have to carefully determine the end use or end-user of US
high-tech, potentially dual-use goods. Chinas national laboratories
and the majority of Chinas military/defense industrial enterprises
are located in this region, some of which are involved in foreign joint
ventures.
- The amount of FDI coming into China reached a peak of $111,436 million
and 83,437 new contracts in 1993. The greatest growth has been in the number
and value of joint venture contracts, although the number of overall contracts
has decreased since 1993. Chinas investment and industrial policies
frequently include explicit provisions for technology transfers in the form
of local content requirements, production export quotas, and/or collaboration
in production, research or training.
- China receives more foreign direct investment than any other developing
nation and currently ranks second only the United States. In 1996, the US
contribution to Chinas FDI inflow was almost $3 billion, much of which
was invested in manufacturing enterprises. The US is among the top FDI contributors
to China.
- The rate of Chinese utilization of FDI (contracts or investments that
are actually implemented or used) amounted in 1996 to over 50 percent, for
the first time since 1990. This indicates that Chinese officials and enterprises
are making better use of, and can better absorb, foreign capital and the
technology that typically accompanies it.
- Exports outnumber imports in Chinas top trading, coastal zones (except
in the cities of Beijing, Shanghai, and Tianjin, where imports exceeded
exports in 1996). According to Chinese statistics, the share of Chinese
exports produced in foreign-invested plants (either joint ventures or wholly
foreign owned enterprises) has grown significantly over the last decade,
accounting for nearly half of all exports in 1996.
Import Policies
- In the effort to develop indigenous high-tech industries, China's foreign
import and investment policies have become increasingly selective and restrictive
in the type of imports and investments that are allowed or officially encouraged.
In particular, there has been an increased emphasis on industry-specific
investment and high-technology imports.
- The Chinese leadership has identified several industrial sectors as "pillar"
industries, namely machinery, electronics, petrochemicals, automobiles and
construction materials. The central government will provide more than $60
billion through the year 2000 to promote domestic capabilities in these
industries. These pillar industries will be developed with preferential
state support as the primary engines of continued economic growth in China.
Defense Conversion
- Chinas economic and industrial development strategies and defense
conversion programs are also intended to assist Chinas military development.
- Chinas military capabilities are considered by Western and US analysts
to be far behind in terms of Western models of military technology as well
as in command, control, and force structure. However, the extent to which
the commercial activities of Chinas civilian defense industrial complex
are tied to the uniformed military departments (PLA) is not well understood
in the West. More research is needed on this issue.
The Role of US Technology
- One of the more common approaches to establishing a presence as well as
goodwill in China is by donating equipment or funds for training or education
in China. Numerous US high-tech firms have done so, often in connection
with one of Chinas leading universities or research centers.
- The most significant commercial offset and/or initiative put forward by
US high-tech companies in seeking approval for joint venture manufacturing
partnerships or facilities in China is the establishment of an institution,
center, or lab devoted to joint research and development. This is a relatively
recent trend and involves many US firms in several high-tech sectors in
China. Compared to donations of equipment and scholarships as well as training
for Chinese workers, the new R&D initiatives would appear to involve
more technology transfer to China. The extent of collaboration and product
development, however, is as yet unclear.
PART 2:
US PERSPECTIVES ON TECHNOLOGY TRANSFERS TO CHINA
This section examines US investments in three key industry sectors in China:
automotive, aerospace, electronics (including telecommunications). Each case
study assesses the relationship between investment by high-tech US firms and
provisions in Chinas investment or industrial policies, competition
with Chinas state-owned or non-state sector enterprises, the effect
of Chinas infrastructure on investment, and the current state of the
industry in China. Also addressed are technological or potential military
advances that could result from US commercial technology transfers. Trade
statistics are included as a means of assessing the effect(s) of US high-tech
investment in these areas. Finally, a brief examination is made with regard
to the approaches to technology transfers taken by the European Union nations
and Japan, and contrasting these to the prevailing US view.
Key findings:
- The dynamism of Chinas relatively rapid economic liberalization
since 1978 has overshadowed in large part Chinas industrial goals
and policies that are explicitly designed to restrict and manage foreign
investment in order to protect and bolster Chinas domestic industries
through acquisition of high-technology imports.
- While numerous complaints have been registered by US companies with the
US Government (formally and informally) with regard to unfair trade practices
in China, many companies are hesitant, if not unwilling, to complain publicly
or even privately about the numerous difficulties inherent in doing business
in China. Nevertheless, the majority of industry representatives interviewed
for this study clearly stated that technology transfers are required to
do business in China, although most also were optimistic about their future
business prospects in China. They also did not think the "price" had yet
become too high in terms of the level or type of technology transferred
as a result.
- Chinas is a buyers market. As such, the leverage of such an
enormous potential market allows Chinese officials to frequently play foreign
competitors against one another in their bids for joint venture contracts
and large-scale, government-funded infrastructure projects in China. The
typical result is usually more technology being transferred as competitors
bid up the level or type of technology that they are willing to offer. There
are also recent cases, however, of foreign companies joining forces with
domestic or foreign companies in the same industry in order to enhance their
own leverage. Microsoft, DEC, and Oracle, for instance, have joined forces
in selling software in China and Exxon, Raytheon, Dupont, and Union Carbide
have teamed up with Japanese companies in China. Although cooperation may
not be possible across all industries, where such an arrangement is possible,
there will likely be less technology being transferred or coerced from foreign
firms.
- The answer given most often in interviews and in press reports as to why,
despite demands made for commercial technology transfers and other unfair
trade practices in China, US industry continues to invest heavily in China
is that one cannot not be in China lest a competitor get a foothold.
US high-tech firms seem willing to pay the price in technology transfers
- in exchange for limited market access.
- US high-tech firms in China enjoy large market shares in the aerospace
and electronics industries, although not in the automotive sector. Despite
several years of high-level investment in China, however, survey data and
press reports indicate that relatively few US companies are realizing profits
or even a return on their investments in China.
- Chinas electronics sector, more than the other industry sectors
studied, has emerged rapidly and achieved some technological successes.
This is because of the sheer size of Chinas market, the learning curve
in the electronics industry (the potential for "fast followers" based on
the success of other Asian nations in this sector), and the potential for
"leapfrogging" to the most advanced technologies (which Chinas comparatively
immature electronics market and infrastructure makes more likely). Chinas
capacity and increasing sophistication in the electronics sector could,
if current trends continue, easily make China a leading producer (by volume)
of electronics in the next decade or two. However, Chinas electronics
industry remains highly dependent on foreign inputs for design, marketing,
and R&D.
- While the EU has fully and officially embraced technology transfers to
China, Japan has been in the past more conservative in investing or sharing
its advanced technologies, while the United States approach has been
somewhere in the middle.
Conclusion: US Commercial Technology
Transfers to China
This section addresses the potential short- and long-term economic and security
implications of US technology transfers to the People's Republic of China.
The conclusion addresses the basic questions that this study is designed to
answer: "Is the transfer of US technology the price of entry into Chinas
market?," and "Are US commercial technology transfers forced?" The following
are key findings resulting from this study:
Key Findings:
- According to experts and executives interviewed for this study, the transfer
of advanced US technology is the price of market access in China for US
high-tech companies.
- Most US and other foreign investors in China thus far seem willing to
pay the price of technology transfers - even "state-of-the-art technologies
- in order to "gain a foothold" or to "establish a beachhead" in China with
the expectation that the countrys enormous market potential eventually
will be realized. A primary motivation for investing in China at this time
and despite the difficulties and risks involved, is in order to beat foreign
and domestic competitors to the China market.
- Numerous US high-tech firms have agreed to commercial offset or technology
transfer agreements in exchange for joint ventures and limited market access
in China. An increasingly frequent type of commercial offset is the establishment
of a training or R&D center, institute, or lab, typically with one of
Chinas premier universities or research institutes located in Beijing
or Shanghai.
- Technology transfer is both mandated in Chinese regulations or industrial
policies (with which US companies wishing to invest in China must comply)
and used as a deal-maker or sweetener by US firms seeking joint venture
contracts in China.
- Unless significant changes are made to Chinas current investment
regulations and import/export policies, US commercial technology transfers
to China are likely to continue, potentially enhancing Chinese competitiveness
in high-technology industry sectors such as aerospace and electronics. The
US-China trade imbalance may continue to worsen in the short term as commercial
offset demands and foreign-invested enterprise exports increase and in the
long term as Chinas plans to develop indigenous capabilities in both
basic and advanced technology industries are implemented.
- In the industry sectors studied, it is apparent that what technological
advances and increased exports exist are disproportionately due to foreign
investment capital and technology rather than to indigenous technological
advances.
- The US export control review process is not designed to evaluate continuing
US commercial technology transfers to China that are demanded or offered
in exchange for market access.
- Although it is not possible to make a clear determination of the US national
security implications of commercial US technology transfers to China, the
continuation of the trends identified in this study could pose long-term
challenges to US national security interests. This study does not identify
any specific Chinese military advances made as a result of US commercial
technology transfers, but does suggest that continued pressures on foreign
high-tech firms to transfer advanced commercial technologies, if successful,
could indirectly benefit Chinas efforts to modernize its military.
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